Trends in Separately Managed Accounts: UMAs, ETFs and Alternatives

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When it comes to separately managed accounts, Envestnet has a unique angle to see trends from both the SMA manager’s perspective and the advisor perspective, since it offers access to some 700 SMA managers, dozens of models-based portfolios, and is constantly adding more managers and creating new products itself for the advisor users of its platform through Envestnet/PMC.

As for the big picture on SMAs, Mike Henkel, managing director of Envestnet/PMC, says “it’s kind of a mixed bag. We’re seeing lots of assets being added to SMAs by advisors, but now we’re seeing them in UMAs” rather than in traditional separate accounts.

In an interview on April 8, Henkel and Tom Simutis, an Envestnet/PMC senior VP in charge of relations with SMA managers, discussed the trends they’re seeing. One development, says Henkel, is that “we’re seeing more in terms of alternative approaches,” not simply individual stocks or bonds in separate account portfolios. As one example, he cites a product that PMC has put out in cooperation with Brian Singer of Singer Partners, the PMC/Singer Partners Dynamic Fixed Income Portfolio. After leaving UBS, Singer started a hedge fund, but the joint product with PMC puts into an SMA format “their approach to an absolute return strategy in a fixed income format using ETFs.”

The new product is, says Henkel (left), a function of “a remarkable convergence of two things happening at the same time”: a desire among advisors to gain access to alternative investments while also seeking transparency and liquidity. “Advisors want two kinds of information,” says Henkel: “Who’s doing it and how are they doing it?” That, he says, is the “beauty of the SMA space—you always have transparency and liquidity.”

Fixed income alternatives are of particular interest to advisors now—“no one wants to be on the long side of fixed income,” says Henkel. Simutis confirms that Envestnet/PMC is always getting requests for strategies that are “noncorrelated” to the broader stock indexes, but also “replacements for fixed income. SMA managers are using ETFs, they can use synthetic shorts, can buy bundles of equities.” There’s a growing use of ETFs as a component of a SMA manager’s strategy, he says, “where the rest of the portfolio may be invested in stocks or bonds.”

What else are advisors looking for? Simutis says that on the fixed income side, in addition to alternatives “it almost seems like a move toward a more traditional approach; we’re getting a lot of calls” for bond ladders, because “they’re cheap and easily understood.” Simutis says Envestnet is also responding to calls for a sovereign debt product,” reflecting a desire for diversification. Henkel points out that “ non-US debt is a little better from a long-term perspective,” citing better returns available overseas than from Treasuries, and the recent decision by the European Central Bank to raise rates.

Henkel argues that much of the movement in the SMA space is in the unified managed account (UMA) space, though it doesn’t register on the radard. “There’s a lot going on there” he says, “but it’s hidden.”

Simutis reports over the last two years the trend has been toward UMAs, a trend that has noticeably picked up this. Many formerly skeptical SMA managers, he says, have been “very open to adopting the UMA approach; we’ve seen some of the holdouts moving in that direction."

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